Blog: CPI Impact

Written by Talya Misiri

05/09/17

While the Consumer Price Index rate of inflation stayed the same at 2.6 per cent throughout July, the pensions and investments industry has advised people to take advantage of this period of calm.

In response to the stagnant inflation rate, there is a general consensus encouraging the uptake and provision of financial advice.

Prudential retirement expert Stan Russell comments: “Inflation remaining unchanged is good news for retired people but financial advisers have a crucial role helping clients understand just how much they can withdraw from their pension funds.”

Russell explains that advisers have noted that many savers are unrealistic about how much money they need in retirement, and two-thirds say running out of money early is the greatest risk that clients face. As a result of this, the current inflation figures and economic climate should give advisers a chance to assist savers to draw down a sustainable retirement income, he says.

“A comprehensive drawdown review using cashflow modellers will help their [financial advisers’] clients understand what level of income is sustainable in retirement,” Russell adds.

Nonetheless, it has also been noted that although prices have not jumped as expected, the upward trend over the past few months has increasingly put pressure on UK households. This is especially visible among pensioners and those on a fixed income, Aegon head of pensions Kate Smith comments.

“In these turbulent times, it’s concerning that the effects of rising inflation are yet to register with much of the UK population. Two thirds of people have taken no steps whatsoever to protect their savings and investments against the erosive effects of rising inflation,” Smith says.

As prices are expected to continue to rise by the year end, however, Smith shares the view that “it’s important that people take the time to factor this into their financial planning, and talk to a financial adviser when possible”.

Moreover, it has also been observed that the current inflation rates could lead to an uplift in interest rates.

Aegon investment director Nick Dixon adds: “Such an increase would present new challenges, and new opportunities, for those owning investments whose valuations are linked with interest rates.

“All asset classes feel richly valued at present so we take a cautious view in aggregate, with particular concerns around fixed interest, real estate, non-sterling assets and US equities where valuations look particularly high.”

Royal London Asset Management economist Ian Kernohan concluded: “While there is still some residual impact of sterling devaluation to feed through, with underlying inflationary pressures low, we think that CPI is close to topping out for the immediate future. In its latest Inflation Report, the Bank of England forecast inflation to peak at 3 per cent in the autumn, and will be happy to keep interest rates on hold as a result.”